In a decision of April 3, 2024, the Swiss Federal Supreme Court (“SFSC”) dismissed an application by Spain for an annulment of an arbitral award issued by an ad hoc-arbitral tribunal seated in Geneva. The arbitral tribunal had held that Spain had failed to accord fair and equitable treatment to a French company which had acquired and developed, through Spanish subsidiaries, twelve photovoltaic installations in Spain, and had awarded to the French investor EUR 29 million in compensation.
1. Factual Background
In the mid-2000s, Spain had adopted Royal Decrees which had set attractive feed-in tariffs for qualified photovoltaic installations for the first 25 years of operation. The decrees were very successful and attracted many investors. One of them was a French company which acquired and developed, through Spanish subsidiaries, twelve photovoltaic installations on Spanish territory.
The decrees led to a growing gap between the electricity prices paid by customers for their electricity consumption and the regulated costs of the Spanish electricity market, including the costs associated with renewable energy support mechanisms. Between 2010 and 2013, Spain modified the financial support measures provided for in the Royal Decrees to combat its energy tariff deficit. In 2013 and 2014, Spain repealed the decrees and replaced fixed feed-in tariffs for photovoltaic installations with a remuneration intended to provide investors with a reasonable rate of return.
In 2016, the French investor initiated arbitration proceedings against Spain based on Art. 26(3)(a) of the Energy Charter Treaty of December 17, 1994 (“ECT”). The investor argued that Spain had breached Art. 10(1) ECT by adopting the new regulations in 2013 and 2024, thereby failing to accord fair and equitable treatment to the French investor. The investor claimed a compensation of the financial losses resulting therefrom.
2. Legal Background: The Energy Charter Treaty and the Treaty of Lisbon
At the time of the investments, Spain, France and the European Union (“EU”) were members of the ECT.[1] The ECT entered into force in April 1998. It was concluded by the European Community, the European Coal and Steel Community (“ECSC”), the European Atomic Energy Community (“EURATOM”) and several, although not all, Member States of the European Community.[2] At the time of signing of the ECT, investment protection was a competence of the Member States of the European Community.
The goal of the ECT is the liberalization of energy trade in Europe and the protection of investments in the energy sector. To safeguard investments, the ECT contains substantive standards of protection for investors from other states, namely fair and equitable treatment (“FET”), full protection and security (“FPS”), non-discrimination and the requirement that expropriations should only be carried out for the common good and against compensation.
In addition to these substantive protections, the ECT, like most modern investment protection treaties, gives investors the option of settling disputes with the host states not through litigation before the courts of the host state but through arbitration proceedings either before the International Centre for Settlement of Investment Disputes (“ICSID”) or the ICSID Additional Facility, or through ad hoc arbitration proceedings under the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL”) or the Arbitration Rules of the Stockholm Chamber of Commerce (“SCC”) Arbitration Institute.[3]
With the entry into force of the Treaty of Lisbon in 2009, the EU was granted exclusive competence for foreign direct investments within the framework of the Common Commercial Policy pursuant to Art. 207(1) of the Treaty on the Functioning of the European Union (“TFEU”)[4]. The ECSC Treaty expired but the EU and EURATOM remained contracting parties, as did France and Spain.
The newly established exclusive competence of the EU for foreign direct investments triggered several legal questions regarding the relationship between EU law and investment protection under bilateral and multilateral investment protection treaties to which the Member States were a party. One of the most controversial questions was whether arbitral tribunals should be allowed to decide investment disputes between a Member State and an investor from another Member State of the EU (so-called intra-EU investment disputes).
In the Achmea case[5], the ECJ had to deal with this question in the context of the bilateral Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federative Republic. The ECJ held that Art. 267 and Art. 344 TFEU preclude such arbitration provisions in Bilateral Investment Treaties (“BIT”) between EU Member States.
The ECJ argued that questions of EU law may have to be decided in such intra-EU investment disputes for which the exclusive jurisdiction lies with the ECJ.[6] Contrary to the opinion of Advocate General Wathelet[7], the ECJ took the position that private arbitral tribunals cannot submit questions of EU law to the ECJ under Art. 267 TFEU and request preliminary rulings by the ECJ. Deviations from the ECJ interpretation of EU law can also not be remedied by the national courts in proceedings for the recognition and enforcement of arbitral awards, as violations of EU law were not part of the permitted level of scrutiny in these proceedings. Consequently, the full effectiveness of EU law was not guaranteed if arbitral tribunals were allowed to decide intra-EU investment disputes. Investor-State arbitration clauses contained in BITs between Member States were therefore considered to be contrary to EU law and thus inapplicable.
The Achmea decision left open whether the same principles apply to multilateral investment treaties like the ECT. The Komstroy case[8] gave the ECJ the opportunity to answer this question – in an obiter dictum – in the affirmative.
The ECJ argued as follows:
- International agreements concluded by the European Community, or the EU bind the institutions of the EU and the Member States.
- International treaties therefore form an integral part of the Community legal order.
- The ECT, as an international treaty to which the EU is a party, is part of EU law.
- The courts of the Member States and the ECJ safeguard the autonomy of EU law and ensure consistency and uniformity in the interpretation of EU law via the preliminary ruling procedure.
- Arbitral tribunals established under the ECT would have to apply EU law without themselves being entitled to refer cases to the ECJ.
- Allowing arbitration proceedings in intra-EU investment disputes would thus jeopardize the uniform application of EU law.
- The ECT cannot change the internal system of jurisdiction of the EU.
- Thus, Art. 26(2)(c) ECT must be interpreted as meaning that it is not applicable to disputes between a Member State and an investor from another Member State concerning an investment made by the latter in the first Member State.
This line of argument did not consider the justified expectations of investors that possible disputes with the host state will be decided by a neutral arbitral tribunal rather than the courts of the host state. For the ECJ, these expectations did not need to be protected because “in accordance with Article 19 TEU, it is for the national courts and tribunals and the [ECT] to ensure the full application of [EU] law in all the Member States and to ensure effective judicial protection of the rights of individuals under that law.”
3. The arbitral proceedings and the arbitral award
In 2016, the French investor initiated arbitration proceedings against Spain, thereby accepting Spain’s unconditional offer under Art. 26(3)(a) of the Energy Charter Treaty of December 17, 1994 (“ECT”) to submit possible disputes under the Treaty to arbitration. Consequently, on February 24, 2016, i.e. two years prior to Achmea, an arbitration agreement formally came into force between the French investor and Spain. A three-member ad hoc arbitral tribunal was set up with its seat in Geneva.
In November 2017, the European Commission (“EC”) decided that the financial support mechanism replacing the fixed feed-in tariffs which had been introduced by Spain in 2013 and 2014 was compatible with European law. One year later, the EC requested the right to intervene in the arbitral proceedings between the French investor and Spain. The tribunal invited the EC to file an amicus curiae brief on the issue of whether the EC’s decision of November 2017 was binding on the tribunal. The EC submitted its amicus curiae brief in January 2019.
During the proceedings, Spain raised the objection that the arbitral tribunal lacked jurisdiction. Referring to the Achmea and Komstroy decisions of the ECJ, Spain and the EC argued that the Tribunal was not competent to hear a dispute between an investor from a Member State of the EU and one of the Member States concerning an investment made by the former on the territory of the latter.
On April 11, 2023, the arbitral tribunal issued its award. It rejected the argument raised by Spain and the EC that the tribunal had no jurisdiction because of the EU-internal nature of the dispute. As to the merits of the claim, the tribunal held that Spain had breached Art. 10(1) ECT by adopting its new regulations in 2013 and had failed to accord fair and equitable treatment to the French investor and therefore had to compensate the financial losses resulting therefrom.
4. The decision of the Swiss Federal Supreme Court
In May 2023, Spain lodged an appeal with the Swiss Federal Supreme Court (SFSC) and requested the annulment of the award. Like in the arbitration proceedings, Spain argued that the arbitral tribunal lacked jurisdiction as the unconditional offer to arbitrate, enshrined in Art. 26(3)(a) ECT, did not apply to intra-EU investment disputes and that EU law prohibits Spain from consenting to the settlement of such disputes by arbitration.
Based on a thorough analysis, the SFSC rejected the legal arguments brought forward by Spain and dismissed the appeal. The court pointed out that the dispute between the French investor and Spain was part of the broader attempt of the EU to question the very legality of recourse to investment arbitration in intra-EU investment disputes. The SFSC could not find a basis in international law for such a “crusade” against intra-EU investor state arbitration.
4.1. Komstroy judgment asserting primacy of EU law is pro domo decision without a valid basis in international law
The SFSC rejected the position of the ECJ that arbitration clauses in multilateral investment treaties like the ECT do not apply to intra-EU investment disputes because arbitration in such disputes was contrary to EU law. The SFSC accused the ECJ to have come to its conclusion “without any consideration of international law or the rules of treaty interpretation”. For the SFSC, the Komstroy judgment was a pro domo decision asserting the primacy of EU law over that of an international agreement without a valid basis in international law. The opinion of the ECJ was thus irrelevant for the SFSC when deciding about the appeal.
4.2. Art. 26(3)(a) ECT must be interpreted in accordance with fundamental principles of treaty interpretation
Ascertaining for itself the meaning and scope of Art. 26 ECT, the SFSC concluded that it was not possible to call into question the validity of the consent given by Spain to settle investment disputes by arbitration and that the ECJ interpretation of Art. 26 ECT was not in line with fundamental principles of treaty interpretation.
The SFSC emphasized that the ECT, like any other international treaty, must be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”[9] In addition, the principle of effectiveness (effet utile) had to be applied which requires that treaty provisions are given meaningful effect. Treaty clauses may neither be rendered superfluous nor deprived of significance for the relationship between the parties. Referring to established principles of international law, the ECJ stressed that the treaty interpreter must choose from among several possible meanings the one that allows for the effective application of the clause whose meaning is being sought, while avoiding a meaning that contradicts the letter or the spirit of the treaty.
4.2.1 Ordinary meaning of the terms of Art. 26 (3) (a) ECT
Applying these fundamental principles of treaty interpretation to Art. 26 (3) (a) ECT, the SFSC held that the interpretation by the ECJ, the EC and Spain was untenable. Art. 26 (3) (a) ECT states that “each contracting party gives its unconditional consent to the submission of any dispute to arbitration”, subject only to the exceptions covered by Art. 26 (3) (b) and (c) ECT. Interpreted in good faith, the term “unconditional” means that the consent to arbitration is expressed without reservation and is unrestricted. Nothing in Art. 26 ECT suggests that the scope of the “unconditional consent” to arbitration is subject to limits and does not cover intra-EU investment disputes. The provision is also general in scope since an investor can submit “any dispute” to arbitration. Finally (and undisputed), none of the exceptions mentioned in Art. 26 (3) (b) and (c) ECT applied to the dispute between the investor and Spain.
Consequently, the preconditions of Art. 26 (3) (a) ECT for submitting the dispute to arbitration were met for the SFSC, as
- Spain and France were Contracting Parties in the meaning of Art. 1 (2) ECT,
- the investor was an Investor in the meaning of Art. 1 (7) ECT,
- the dispute between the parties concerned an Investment within the meaning of Art. 1 (6) ECT and
- the dispute was about an alleged breach of an obligation contained in Title III ECT.
4.2.2. Context of Art. 26 (3) (a) ECT
The SFSC then considered whether the context of Art. 26 (3) (a) ECT could justify the exclusion of intra-EU investor-state arbitration from the application of Art. 26 (3) (a) ECT. Spain and the EC had argued that the combined reading of Art. 1 (3) and (10) and Art. 25 ECT would establish the existence of an autonomous legal regime within the ECT which was specific to EU Member States, thereby recognizing the primacy of EU law over the ECT.
The SFSC did not buy this argument. For the court, the fact that the EU constitutes a Regional Economic Integration Organization (REIO) in the meaning of Art. 1 (3) ECT, or that EU Member States are parties to an economic integration agreement (EIA) in the meaning of Art. 25 (1) ECT does not allow to conclude that the competences transferred by EU Member States to the EU fall outside the scope of the ECT, that the areas concerned are governed exclusively by EU law or that the Member States are not bound by the provisions of an international treaty they have ratified. If the EU and its Member States had intended to limit the scope of their unconditional consent in Art. 26 (3) (a) ECT to arbitration proceedings brought by investors from third countries, they could and should have expressed this intention clearly in the text of the ECT. They did not.
4.2.3. Object and purpose of Art. 26 (3) (a) ECT
The SFSC also considered whether the object and purpose of the ECT justified an exclusion of intra-EU investment disputes from the application of Art. 26 (3) (a) ECT. Again, the answer was negative.
Art. 2 ECT, entitled “Purpose of the Treaty”, states that the ECT aims to establish “a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter.” In reaching this goal, the ECT does not distinguish between the geographical origins of investors. To deprive investors from EU Member States of the right to initiate arbitration proceedings against another Member State even though Art. 26 (3) (a) ECT expressly grants such a right would be counterproductive as it would frustrate the justified expectations of investors.
4.2.4. Declaration of the 22 does not change the scope of Art. 26 (3) (a) ECT
Spain and the EC also had argued that the arbitral tribunal should take into account the declaration formulated on January 15, 2019, by twenty-two EU Member States (including France and Spain) on the legal consequences of the Achmea judgment (“Declaration of the 22”).[10]
Referring to Art. 31 (3) (a) and (b) VCLT, Spain and the EC had maintained that the Declaration of the 22 constitutes a subsequent agreement between the parties on the interpretation of the ECT, and in particular on the scope of the arbitration clause enshrined in Art. 26 ECT, respectively a subsequent practice followed in the application of the ECT.
The SFSC rejected these arguments as well. It pointed out that
- Art. 31 (3) (a) and (b) VCLT require an agreement or practice of the parties to the treaty,
- the Declaration of the 22 was not formulated by all the parties to the ECT, but by certain States only,
- the Declaration of the 22 had not even been signed by all EU member states.
In these circumstances, the SFSC found that the Declaration of the 22 cannot be regarded as a subsequent agreement between the parties on the interpretation of the ECT or its application within the meaning of Art. 31 (3) (a) VCLT, nor as a subsequent practice in the application of the ECT within the meaning of Art. 31 (3) (b) VCLT.
Since the Declaration of the 22 only referred to the Achmea decision, the SFSC concluded that the Declaration of the 22 does not seek to interpret the provisions of the ECT, but only to clarify the legal consequences of the Achmea judgment, which had nothing to do with the ECT. For the SFSC, the Declaration of the 22 was thus only a declaration of intent, for political purposes, by the 22 States concerned, who intended to give, in future, a new reading to their unconditional consent to the arbitration provided for by the ECT, in order to set aside arbitral awards potentially prejudicial to their interests in the future.
In any event, even if the Declaration of the 22 was to be recognized as having some value under Art. 31 (3) VCLT, it could not be given retroactive effect. The French investor who had initiated arbitration proceedings in 2016 could rely in good faith on the offer of arbitration made unconditionally by Spain under Art. 26 (3) (a) ECT, and cannot be denied the right to have its case decided by an arbitral tribunal on the basis of a document drawn up more than three years after the initiation of the arbitration proceedings.
4.2.5. Primacy of EU law cannot be derived from Artt. 30 and 41 VCLT
Spain had also argued that the primacy of EU law over the ECT derives from Artt. 30 and 41 VCLT. For the SFSC, the arguments put forward were not convincing.
To start with, a conflict between Art. 26 ECT and the EU treaties had not been established for the SFSC. The fact that Art. 207 (1) TFEU had conferred exclusive competence on the EU in the field of foreign direct investment did not mean that previously concluded multilateral international treaties automatically had become contrary to EU law. Referring to the Komstroy case, the SFSC pointed out that the ECJ itself had stated that an international agreement providing for the establishment of a court to interpret its provisions, whose decisions are binding on the EU institutions, including the ECJ, is not, in principle, incompatible with EU law.
The SFSC also rejected the idea that Art. 344 TFEU makes Art. 26 ECT incompatible with EU law as this provision only obliges Member States to refrain from submitting a dispute “concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein”, but not their nationals. Finally, the SFSC pointed out that Art. 344 TFEU refers to disputes concerning “the interpretation or application of the Treaties”. According to Art. 1 (2) TFEU, the term “the Treaties” refers to the TEU and the TFEU. For the SFSC, the wording of the relevant provisions of the TFEU did therefore not support the idea that Art. 344 TFEU also covers investment disputes between an EU Member State and an investor located in another Member State.
Even if Art. 26 ECT was in fact incompatible with EU law, there was no reason for the SFSC to conclude that the rules of the TFEU should take precedence over those of the ECT. For the SFSC, it did not follow from Art. 31 (3) (c) VCLT that other international commitments entered by certain State parties to the ECT should prevail in the event of a conflict with the provisions of the ECT. A multilateral treaty must, as the SFSC pointed out, in principle, be interpreted in the same way for all contracting parties, and not be given a different meaning depending on other agreements concluded by some of them, as this would undermine legal certainty.
Art. 30 VCLT did also not support the idea of a primacy of EU law over the ECT. Firstly, the ECT and the TFEU do not concern the “same subject matter” within the meaning of Art. 30 VCLT. While the ECT aims to establish a legal framework to promote long-term cooperation in the field of energy, the TFEU aims to organize the functioning of the EU and to determine the areas, limits and procedures for exercising its competences. The TFEU does not cover the promotion and protection of investments in the energy sector.
Secondly, Artt. 267 and 344 TFEU on which the ECJ had based its assertion of the primacy of EU law over Art. 26 ECT in the Komstroy case, already existed, in a different form, at the time the ECT was concluded. The provisions were taken over from previous EU treaties under a different numbering when the Lisbon Treaty was adopted
The SFSC did also not accept that EU law is hierarchically superior to the EC Treaty by virtue of Art. 30 (2) VCLT. For Art. 30 (2) VCLT to apply, the ECT would have to specify that it is “subordinate” to the TFEU or mention that it is not to be considered incompatible with the TFEU. However, nowhere does the ECT suggest that it is subordinate to other international commitments entered into by the contracting states, nor do the provisions of the TFEU state that it takes precedence over the ECT.
The decisive factor for the SFSC was the fact that Art. 16 of the ECT provides that no norm of an international treaty concluded by two or more contracting parties before or after the conclusion of the ECT may be interpreted as derogating from the provisions of Parts III or V of the ECT, nor from the right to require settlement of a dispute on this point in accordance with the ECT, where such provisions are more favourable to the investor or investment. For the SFSC, this specific conflict rule confirms that the right of an investor to submit a dispute to an arbitral tribunal in accordance with Art. 26 ECT was to be guaranteed, notwithstanding any less investor-friendly conditions that may be provided for in other international treaties. If the parties to the ECT had really wished to set up a special regime for EU Member States, they could and should have explicitly mentioned this in the ECT. As the parties failed to do so, the SFSC concluded that Art. 26 ECT takes precedence over the dispute resolution mechanism provided for in the TFEU, giving the investor from a Member State of the EU the right to submit a dispute with another EU Member State to the jurisdictional authority of his choice (state courts or arbitral tribunals).
Finally, the SFSC did also not accept Spain’s claim that the TFEU constituted an agreement with the purpose to, inter alia, modify the ECT in the mutual relations of the EU Member States. Firstly, the SFSC pointed out that the ECT does not provide for the possibility of such a limited amendment. Secondly, in accordance with Art. 41 (1) VCLT, an agreement, concluded by two or more parties to a multilateral treaty with the object of modifying the multilateral treaty in their mutual relations only, is only possible if the intended modification in question neither affects the enjoyment by the other parties of their rights under the treaty nor the performance of the treaty obligations and is not incompatible with the effective attainment of the object and purpose of the multilateral treaty as a whole.
For the SFSC, these conditions were not met. For one, to exclude the possibility of submitting a dispute to arbitration in accordance with Art. 26 ECT contravenes Art. 16 ECT. Moreover, excluding the application of Art. 26 ECT to disputes of an intra-European nature would be incompatible with the effective achievement of the object and purpose of the ECT, given that Art. 16 ECT provides, in substance, that no provision of another international treaty may be interpreted as derogating from the right to demand settlement of the dispute in accordance with art. 26 ECT.
4.3. Arbitral award does not violate Swiss jurisdictional public policy, Art. 190 (2) (e) Swiss Federal Act on Privat International Law
Finally, Spain had argued that the recognition of the arbitral award would violate the Swiss jurisdictional public policy, Art. 190 (2) (e) Swiss Federal Act on Privat International Law (“PILA”). By recognizing the arbitral award, Switzerland would refuse to take account of the ECJ’s exclusive jurisdiction for intra-EU investment disputes and would arrogate to itself the power to validate an EU Member State’s consent to arbitration. Thereby, Switzerland would interfere in EU law and would hinder the execution of treaties to which it is not a party.
The SFSC did not accept this argument. As the arbitrability is a condition for the validity of the arbitration agreement and, consequently, for the jurisdiction of the arbitral tribunal, it falls within the scope of Art. 190 (2) (b) PILA which provides that an arbitral award “may be set aside only … where the arbitral tribunal wrongly accepted or declined jurisdiction.” The SFSC did not see any basis to argue that by accepting the tribunal’s jurisdiction, Swiss jurisdictional public policy was violated.
5. Conclusion
The landmark decision of the SFSC, with its textbook interpretation of international treaties confirms that the Achmea and Komstroy decisions of the ECJ are untenable.
To protect the autonomy of EU law, it is by no means necessary to deny arbitral tribunals the competence to decide investment disputes between a Member State and an investor from another Member State of the EU. Even if the basic assumption of the ECJ of an incompatibility between Art. 26 ECT and EU law was convincing – which it is not -, the ECJ could have avoided the numerous disputes over the enforceability of arbitral awards in intra-EU investment disputes if it had followed Advocate General Wathelet in the Achmea case that “an arbitral tribunal constituted in accordance with … the BIT is a court or tribunal within the meaning of Article 267 TFEU”. Thereby, the autonomy of EU law would have been protected while at the same time the obligations of the Member States under international law and the justified expectations of investors would have been respected. It is to the credit of the SFSC that it has exposed this aberration of the ECJ and the EU with its convincing reasoning.
[1] France withdrew from the ECT as of December 8, 2023, Spain’s withdrawal shall take effect on April 17, 2025, and the Council of the European Union adopted the decision to withdraw from the ECT on May 30, 2024.
[2] Council and Commission Decision of September 23, 1997, on the conclusion, by the European Communities, of the Energy Charter Treaty and the Energy Charter Protocol on energy efficiency and related environmental aspects, OJ 1998 L 69/1.
[3] Art. 26(2)(c) ECT in conjunction with Art. 26(4)(a) ECT.
[4] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:C:2016:202:FULL.
[5] Judgment of the Court in the case Slovak Republic v Achmea BV of March 6, 2018.
[6] Art 220 EC, now largely replaced by Art 19 Treaty on European Union.
[7] Opinion of Advocate General Wathelet delivered on September 19, 2017, in the case Slovak Republic v Achmea BV.
[8] Judgment of the Court in the case Republic of Moldova v Komstroy LLC of September 2, 2021.
[9] Art. 31 (1) of the Vienna Convention on the Law of Treaties (“VCLT”).
[10] Declaration of the Member States of 15 January 2019 on the legal consequences of the Achmea judgment and on investment protection
